Bitcoin's Prospects: Bane or Boon?

This month’s arena debate at The Freeman (a GREAT website for articles and research on a multitude of libertarian topics) is about Bitcoin. Daniel Bier takes the skeptical position about the prospects for Bitcoin, while Sam Patterson has hope for the future of the cryptocurrency.

Bier gives a few reasons why he is less than optimistic, dealing with BTC’s price volatility, its use as actual money, and concerns over potential government regulations.

The reason is erratic price fluctuations: During the last year, it has gone through several major crashes, often losing half of its value (or more) over the course of a day or two before clawing its way back. Its most recent correction, beginning earlier this month, has driven its price down by more than 20 percent.

This volatility poses serious liabilities for anyone using the cryptocurrency. Making long-term contracts, keeping your books in order, or simply trying to figure out whether you’ll have made a profit by the close of business become monumental challenges.

It also isn’t clear how often bitcoins are being used to purchase actual goods and services, rather than being traded for other currencies. While every bitcoin transaction is recorded and visible on the blockchain, no one knows what proportion of the 50,000 to 60,000 daily transactions signify purchases in the real economy…

…Many bitcoin enthusiasts seem sanguine about the issue of regulation, arguing that governments can’t easily shut it down, while also pointing out that, to the degree it is successful, it directly undermines the effectiveness of monetary policy, financial regulation, tax collection, and vice laws. If there’s one thing I know about governments, it is that they do not appreciate being undermined. If they perceive BTC to be a threat, a variety of policies could impede its use and destroy its value…

…Prediction is hard, especially (as Yogi Berra said) when it’s about the future, and prophesying about markets or technology is a fool’s errand. I don’t know if BTC is a bubble, but I do know that most new technologies don’t work on the first attempt. Innovation, like entrepreneurship, is the lifeblood of the market economy, but most new businesses do fail. We need people who are willing to take risks, try new ideas, and, yes, sometimes go broke in order to challenge the status quo. This process of trial and error is how the market discovers what works, and we should applaud those who, with eyes wide open, are willing to risk their investments on new ideas…

Patterson argues that Bitcoin, while still a young and new technology, has revolutionary implications.

Bitcoin fills a gaping hole in the Internet. It’s not just a digital currency; bitcoin is a new Internet protocol that allows value to be transferred electronically without trusting third parties or centralized institutions. Let me explain why this process is revolutionary.

Internet protocols determine how our electronic devices communicate with the rest of the world, and they allow us to electronically replicate how we physically interact with each other. We can send messages, share files, do voice and video chat, or visit websites by using different protocols. But one essential interaction has been notably absent: trade. To engage in trade online, we’ve taken old systems, such as the banking infrastructure and credit cards, and tried to force them into a system for which they were never envisioned.

This arrangement has resulted in fraud on a massive scale (see Target), has excluded millions of people from trade who have Internet access but no access to banks or credit, and has given centralized institutions control over how money flows online (ask WikiLeaks donors)…

…

Why do I have such optimism that this growth will continue? Developers—some of the leading innovators of our age—are flocking to bitcoin. The number of bitcoin-related projects on GitHub, the leading online hub for new programming projects, grew from 700 at the beginning of 2013 to 2,500 at this beginning of this year. This rapid increase in the number of projects signals that the developer community is trying to bring bitcoin out of its infancy and into widespread use. Any one of these 2,500 projects or the hundreds more started each month could be a “killer app” that makes bitcoin indispensable to the average user. Programmable money has finally arrived.

I’ve focused on the technological breakthrough of the bitcoin protocol as the reason I’m hopeful for its future, but I’d be remiss not to mention the monetary breakthrough as well. Nation-states and their central banks derive significant benefits from issuing fiat currency and forcing citizens to use it. Now anyone in the world with Internet access has another alternative, and this currency cannot be devalued through the printing presses or seized from bank accounts to pay for governments’ excesses.

A few more reasons to expect wider adoption in the future: Accepting bitcoin is cheaper for merchants than using other payments systems, with fees typically at or below 1 percent compared to the 3 percent to 5 percent typical for credit cards. There is no permission required to use bitcoin, unlike banks or credit card networks, which require standards that billions of people in the world can’t meet or don’t have access to. Transactions aren’t anonymous, but they aren’t directly tied to your identity either. This characteristic gives bitcoin users more privacy than credit cards or banks do (but less than cash does) and no opportunity for merchants or banks to leak personal information leading to fraudulent charges or identity theft.

I definitely side with Patterson in this debate, although Bier makes several excellent points concerning the volatility and dangers of states intervening anyway they can to stop this technology. That’s what states do, after all, especially when faced with competition and a system that gives libertarian, free market anarchy a great proof-of-concept that will help show billions how archaic and irrellevant governments really are.

I am a newbie to the Bitcoin world, but after a few hours of research at Bitcoin.org, I became fascinated with the concept. I can’t help but be a sucker for circumventing state power and not using War Dollars, even with the price volatility. I don’t understand the technology behind Bitcoin, but as Patterson points out, one need not understand how HTTP works to use the Internet and view webpages.

Either way, I am excited about the prospects for Bitcoin and hope it spreads as far as possible. It has already helped homeless people get their lives back together, started charities, and allows the poor around the world to acquire wealth without the tyranny of banking and bureaucracy.

And if you’re feeling generous today and excited about the prospects of Bitcoin, why not donate to my blog? I can assure you every penny will be put to good use as I do my small part in helping spread the message of peace and human liberty to anyone who will listen.